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Motivate and select: Relational contracts with persistent types
Author(s) -
Nikolowa Radoslawa
Publication year - 2017
Publication title -
journal of economics and management strategy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.672
H-Index - 68
eISSN - 1530-9134
pISSN - 1058-6407
DOI - 10.1111/jems.12201
Subject(s) - moral hazard , information asymmetry , ex ante , business , implicit contract theory , relational contract , adverse selection , distribution (mathematics) , microeconomics , contract theory , labour economics , economics , actuarial science , labor relations , incentive , mathematical analysis , mathematics , macroeconomics
We develop a model of relational contracts with moral hazard and asymmetric persistent information about an employee's type. We find that the form of the optimal contract depends on the job characteristics and the distribution of employees' talent. Bonus contracts are more likely to be adopted in complex jobs and when high talent is not too common or too rare. Firms with “normal” jobs are more likely to adopt termination contracts. In labor market equilibrium, different contracts may be adopted by ex ante identical firms. Hence, we offer an explanation for the coexistence of different employment systems within the same industry.